The Gujarat High Court held that GST input tax credit on leasehold rights is admissible, ruling it is not barred under Section 17(5) of the CGST Act, 2017. The Court clarified the transaction was not construction and found Section 17(5)(d) misinterpreted.
GUJARAT: The Gujarat High Court ruled that input tax credit (ITC) is eligible for GST paid on leasehold rights because it is not blocked under section 17(5) of the CGST Act, 2017. Since the activity in question does not amount to construction, the restriction in that section does not apply.
Justice A.S. Supehia and Justice Pranav Trivedi noted that the case began without proper authority and that Section 17(5)(d) of the CGST Act had been misunderstood.
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An SCN issued under section 74 of the CGST Act was quashed by the bench, which had attempted to block ITC of Rs 98.11 lakh, holding that the tax authorities had erroneously invoked provisions relating to blocked credit for construction activities.
The applicant, an Indian resident living abroad who is GST-registered, obtained a right to use an industrial plot in Ankleshwar and partitioned it into smaller lots before transferring these rights to buyers.
GST was charged on such transfers, and ITC was claimed by the applicant on several charges imposed by the Gujarat Industrial Development Corporation (GIDC), including administrative fees, transfer charges, and penalties, all of which were subject to GST.
During FY2022-23, the applicant transferred two sub-plots for consideration and discharged GST liability on several crores.
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Part of the ITC was inadvertently used; it was subsequently reversed via Form DRC-03, and the remaining ITC remained unutilised in the electronic credit ledger.
Thereafter, the department issued a notice alleging an incorrect ITC claim of Rs 98.11 lakh on the basis that the credit was blocked under section 17(5)(d) of the CGST Act, which restricts ITC on goods or services used for the construction of immovable property.
The central issue before the Court was whether the ITC claimed on charges associated with the transfer of leasehold rights in industrial plots could be treated as blocked credit under section 17(5)(d), and whether proceedings under section 74 were warranted in cases of fraud or suppression.
The Court held that Section 17(5)(d) applies to the construction of immovable property and not to transactions involving the transfer of leasehold rights. It noted that the department failed to establish that the applicant had engaged in any construction activity.
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According to the court, the blocked credit provision had been wrongly invoked and the SCN reflected a lack of mindful consideration.
The Court also found that the prerequisites for invoking section 74 of the CGST Act such as fraud, willful misstatement, or suppression of fact were not present. It noted that the applicant had previously reversed a portion of the ITC that had been utilised and had discharged the corresponding tax in cash.
Given the absence of evidence of intentional wrongdoing, the court stated that invoking penal provisions under section 74 was unwarranted and without jurisdiction.
The SCN was quashed on 28 October 2025, and the department was directed to unblock the ITC of Rs 98.11 lakh within three weeks from receipt of the order.
Case Title: NIKET BIPINBHAI PATEL THROUGH POWER OF ATTORNEY HOLDER BIPINBHAI MADHAVBHAI PATEL Vs ASSISTANT COMMISSIONER (A.E.) CGST-CENTRAL EXCISE VADODARA-II COMMISSIONERATE (R/SCA- 18068/2025)
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